Part Five: Seven Growth Stocks Chosen to Let You Sleep at Night

by Dee GillSeptember 05, 2012

For investors who want in on the growth game but prefer less melodrama in their portfolios, YCharts suggests creating another genre: sane growth. In our estimation, a sane growth portfolio would be packed with companies that manage decent sales gains but maintain a few safety valves typically missing in popular growth stocks: like reasonable share price valuations and earnings commensurate with revenues. In fact, right now looks like an especially good time to invest in sanity over popularity.

Go to YCharts for Part One of growth stocks, which explains the list in more detail.

With the mission of reducing risk, YCharts looked around for growing companies with sane data. We set the YCharts Stock Screener to find companies that reported sales growth of at least 10% over the past 12 months and at least that rate of retained earnings growth. We insisted on an historic price to sales ratio of less than 1.5. To weed out companies with weak balance sheets, we looked only at companies that received at 7 or higher from YCharts Pro for fundamentals. As an added safety, we considered only companies with market caps of at least $2.5 billion.

Dollar General used to be the underdog among dollar store investments, outdone by bigger gains from competitors Dollar Tree (DLTR) and Family Dollar (FDO). Still, with share gains ranging from 135% to more than 200% in the past couple of years, no one in this sector has had much reason to complain, as seen in this stock chart.

Going forward, a lot of investment advisors believe there’s more to collect from Dollar General than the other two companies. Dollar Tree’s phenomenal run up is looking a little overdone. The things that once made Dollar Tree and Family Dollar look like stronger companies – like strong profit gains – are no longer foreign to Dollar General. Its earnings have grown more than three times as fast as its revenues in recent years.

Dollar General’s case in the investment community is helped by a record of consistently meeting or beating earnings forecasts. Those forecasts now call for about 9% to 10% sales growth over the next couple of years paired with 17% to 18% earnings per share growth. Fees from a new arrangement allowing the Coinstar’s (CSTR) Redboxes into stores and the traffic they will bring should help.

Conventional wisdom says business drops off at dollar stores when economies recover, but this was not Family Dollar’s experience in the early 2000s. Besides, no one is really worried at the moment about a recovery so rip-roaring that people will lose interest in a bargain.